HermannM

Comparing Prices before the Grocery Trip

In Business, Grocery, Interesting, Marketing on July 15, 2009 at 4:35 pm

I gave a presentation last week on the business case for HomeShop’s digital grocery list. One of the panelists suggested that we incorporate a price comparison feature that allows consumers to choose a grocery store on the basis of cost of the overall basket. My gut reaction was to resist this strategy but I hear it so often from venture capitalists and advisors that I may have to reconsider. The following thoughts are the initial ramblings of a Confused Enthusiast on what I believe to be the key issues in this matter.

The internet was designed to be a democratizing platform that shifts the balance of power from producers and retailers to consumers.  In the early 1990s, we saw price comparison features on just about every retailing application on the internet.  The prevailing concept was that price margins were so fat on manufactured products that favored the rich industrialists at the expense of poor consumers. Price comparison tools changed the balance of power, transferring producer surplus to consumer surplus.  The reduction in price forced manufacturers to increase supplies to maintain profitability while allowing more consumers to enjoy the benefits of so many manufacturing innovations. No more was this true than in the consumer electronics industry, where very few would dare purchase a plasma TV, camcorder or other gadget or device before consulting MySimon or C|NET. Today, many people consult GasBuddy in advance of filling up at the pump and other industries have implemented price comparison tools as well. As a result, I can understand why so many would consider such a tool for the $750 billion grocery industry.

My initial thought is to resist the deployment of a price comparison tool simply because the industry’s margin structure would not support it.  Let me explain…

In the consumer electronics space, everything is new. At product launch, consumers rarely know much about the products available for sale and this provides manufacturers a great deal of latitude in pricing. The original DVD players sold for $1,600 and people paid that price, especially those who relied on retailers to direct their purchases. When retailer information falls short, consumers can rely on user reviews and feature/price comparisons from independent sources to make a decision. Information, in the consumer electronics industry, has been a game-changer. The net effect has been a ceding of market power from producers and retailers to consumers, eventually leading to lower prices and wider adoption. This could have only occurred in an industry where product knowledge and the power of substitutes were low while profit margins remained high. The grocery industry does not exhibit these characteristics.

Last year, Tide launched its Tide-to-Go stain remover. It was the iPhone of cleaning products: Tide had finally gone mobile. A stain on a shirt can mean the difference between getting a job or not; it would be reasonable to expect the on-the-go stain remover to be priced in the range of an increase in salary. But that didn’t happen. Pricing was severely undermined by consumer expectations and the power of substitutes. P&G could never market the item at a price-point anywhere near the consumer surplus it creates; instead, Tide-to-Go sells for $3 a pen (less than a penny a stain). Were it marketed any higher, Katja Presnal and Jessica Gottlieb would have launched an online “twissy-fit,” the likes of which would surely have caused the carcasses of William Procter and James Gamble to turn, if every so slightly, in their graves.

The repetitive cycle of use and purchase, consumption and replenishment allows consumers to quickly gain knowledge of items sold in a supermarket. When knowledge is high, the power of retailers to raise prices is severely undermined. As a result, the best grocery retailers (including my Mom, may she rest-in-peace) are little more than middlemen who convert inventory risk and location to turn a profit. Caught in the squeeze between manufacturers, who take all the risk in bringing products to market, and consumers, whose brand and product knowledge have a restrictive impact on price, supermarket retailers rarely, if ever, have sufficient margin to ever effectively compete on price against one another. This is why I oppose price comparisons in the supermarket space.

From an economics perspective, let’s consider what would happen if consumers knew the price of their entire shopping basket before the moment of purchase. They would simply go to the store with the lowest price. This, in turn, would force retailers to lower their prices to lure consumers. In the short run, every retailer would be caught in a prisoner’s dilemma where the Nash equilibrium solution would be to drop their prices to the level of variable costs. Eventually, some retailers to go out of business. The few that remained would have to rationalize their product offerings, carrying fewer brands in any one category and limiting excess inventory. The marketplace would begin to experience a higher incidence of stock-out and consumers would be forced to visit multiple stores to purchase all the brands they like. Overall, value would be destroyed once market discipline set in. It’s a nightmare scenario. Having grown up in a retailing family and knowing how hard it is to turn a profit, I wouldn’t wish it on my worst enemy.

Price Comparison for Grocery Shoppers

Price Comparison for Grocery Shoppers

That being said, I am very anxious to understand the opposing view. Perhaps the suggestion was the brain-child of a misguided MBA who puts more faith in the philosophies of Gordon Gekko than Epicurus. Or maybe I am missing a key point. In the UK, there is an experiment underway amongst a consortium of top supermarkets. Tesco, Ocado, Sainsbury and Asda each participate in MySupermarket.com’s price comparison service; I am eager to learn if the venture proves successful and if so, if that business model can be ported to North America. Again, my gut reaction is to resist price comparisons… I guess only time will tell.

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I Agree | I Disagree | I’m Not Sure

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  1. Very descriptive blog, I loved that a lot. Will there
    be a part 2?

  2. I’m not sure exactly why but this site is loading very slow for me. Is anyone else having this problem or is it a problem on my end? I’ll check back later and
    see if the problem still exists.

  3. I rarely leave a response, however i did a few searching and
    wound up here Comparing Prices before the Grocery Trip | Thoughts of a Confused Enthusiast.
    And I actually do have a few questions for you if you usually do not mind.

    Could it be only me or does it give the impression like some of
    these comments look like written by brain dead folks? 😛 And, if you are writing on
    other online social sites, I would like to follow everything
    fresh you have to post. Could you list of every one of your social sites like your linkedin profile, Facebook page or twitter feed?

  4. Hello, I log on to your blogs daily. Your writing style is witty, keep doing what you’re doing!

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